Asset Class is simply a grouping of similar types of investments. There are four main groups of Asset Class these consist of Cash, Bonds, Property and Shares. In these four Asset Classes, there can even be Sub-Asset Classes for example, with Shares you can separate into foreign shares and domestic shares.
On the surface, Cash or Money Market can look quite simple. But, if you dig beneath the surface it can become quite complex. With Bankers Acceptances, Promissory Notes, Negotiable Certificates of Deposit, Treasury Bills, Trade Bills, Landbank Bills, Landbank Debentures, Reserve Bank Debentures or even short term Government Stocks. But, for the purpose of this article, we’ll just keep it simple and only focus on Cash or Money Market as money in the bank such as in a bank account or 32-day notice or even a Money Market Unit Trust.
The JSE (Johannesburg Stock Exchange) regulates the Bonds Stock Market; it runs on an electronic settlement system so that transactions may be fast and efficient and reliable. The South African Bond Market is considered even by non-South Africans to be one of the most developed in the world. The major issuer of Bonds in South Africa is our Government.
A Bond is where someone lends money to an entity either a Corporate or Government which borrows the money for a set period of time and at a variable or fixed interest rate. At the end of that period, the investor gets their Capital back in full. For example, if a Bond is issued when the interest rate is 5% with the value of R1000 and a 5% annual coupon, it will generate R50 of cash flow per year for the person who owns the bonds. If the interest rate drops to 4% the bond will continue to pay out 5%.
Property, as the word suggests is, owning property. It could either be physical property such as houses that you live in or Commercial Property where businesses are housed, but it can also be property companies such as Growth Point that is listed on the JSE (Index Funds) that develops property. It could also be property REITS (Real estate Investment Trusts) and Property Index Funds.
What is a Share or Equity? Well, each share represents part ownership in a Company in return for investing capital in the Company. Shareholders are entitled to certain rights. Shares can be defined into two categories, equity and preference shares.
Equity gives the shareholders the power to share in the profits and losses of the company and have the right to vote at Company General Meetings. Preference Shares, on the other hand, earn the shareholders’ Dividends only, which are fixed and give no voting rights.
Shareholders are entitled to certain rights.
These rights may include certain or a combination of the following rights.
- The right to cash a Dividend out of the Company profits when declared by the Company.
- The right to share in the ultimate benefits flowing from reinvested earnings.
- The right to attend the Company’s Annual General Meeting, to ask questions and vote on resolutions.
- The right to elect the Board of Directors of the Company.
- The right to share in any proceeds if the Company is dissolved.
Join us next week as we continue with the cornerstone of investment fundamentals where we will discuss interest.
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Author Ben Charlton
Edited by N Du Preez (Business Internet Marketing Solutions)